It’s either a bubble or a depression, you choose

Did the Federal Reserve just accidentally admit that there are really only two economies we’re capable of having at this point – speculative bubble or asset price meltdown?

Bloomberg reporter Matthew Klein thinks the Fed might have gone insane. His new column essentially chronicles what I’ve lived through since my career started in the late 1990’s.

And then he takes us through this week as Kocherlakota lets a whopper slip out at a speaking engagement:

One might think that the Fed has learned something from this experience. A recent speech from Nayarana Kocherlakota, the president of the Minneapolis Federal Reserve Bank, suggests otherwise. He said that the Fed “will only be able to achieve its congressionally mandated objectives by following policies that result in signs of financial market instability.” In other words, he wants to repeat the exact same formula that Donald Kohn endorsed in the 2000s.

According to Kocherlakota, the Fed is incapable of lowering the unemployment rate without creating more bubbles. This attitude is strange; Kocherlakota implicitly denies the possibility that the economy could ever grow at a healthy pace without the stimulus provided by unsustainable asset bubbles. More precisely, he said that the Fed needed real interest rates to be “unusually low for a considerable period of time” and that this would lead to “unusual financial market outcomes” including “inflated asset prices, high asset return volatility and heightened merger activity.”

Can he truly have meant it’s either Pump or Dump – but definitely one of the two – at all times?